Why do we need GST?

The current tax system gives businesses a tough time as it involves multiple taxes, complex compliance procedures, and intervention by several state and central tax divisions. This makes it highly difficult to setup a business in India which already stands at 133rd position when comes to doing business.

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The reason for introducing the GST regime in India is due to the following reasons:

Multiple taxes and tax cascading
In the current indirect tax structure, up to 20 taxes are levied by the state and the central government before a product reaches the end consumer.

At each stage of a supply chain, taxes are applied on the total value of the product, even though it has already been taxed at the previous level. This process of taxing already taxed goods is referred to as tax cascading. This happens when the government fails to provide credit for input tax (the tax that was paid at the previous stage) to the consumer who buys the product in the next stage.

This heavy tax cascading increases the amount of tax involved in the making of a product, which often is included as part of the manufacturing cost. This shifts the entire tax burden on the end consumer, who will pay upwards of 30-35% in taxes by the time they buy a product.

Interstate movement of goods is difficult
When goods are moved from one state to another, a Central Sales Tax (CST) of 2% is collected on the total value of the goods at the state border. For example, if you have a textile showroom in Chennai and buy garments from Surat, the truck carrying the consignment will be charged a CST of 2% for each state border it crosses. This amount gets added to the cost of the garments that you buy from the manufacturer. On top of all that, the constant taxing of interstate goods delays their arrival, as time is wasted at tax checkpoints at each state border.

Complex compliance procedures
A lack of a uniform tax rate across the country means that Indian businesses today have to comply with multiple tax laws, follow various different tax rates, and face intervention from tax authorities from many states. Businesses that sell goods across states have to maintain a separate record to manage costs according to each state’s tax rate, as well as manage piles of paperwork specific to each state’s tax laws. Failing to comply with all of these rules puts businesses at risk for heavy penalties from the tax department. All of this additional work makes managing interstate taxes complex and stressful, and it often consumes a considerable amount of time, money, and resources.

How can GST change this?
Instead of applying taxes on the total value of the product at each stage, the GST only imposes tax on value addition. Because it provides credit for the input tax paid at each previous stage of a supply chain, this method considerably reduces the overall manufacturing cost. We offer some of the best GST Training in Chennai.

Let’s take a closer look at how this works with a simple example.

Comparison of Current Tax Structure vs. GST

Note: In this example, we are assuming that all taxes associated with the manufacturing process have been paid and the selling price in the first stage is the final price set by the manufacture (excluding VAT).

Current Tax Structure
Imagine a manufacturer selling zinc coated steel buckets, each for Rs.1000 plus a VAT of 10% (which is Rs.100) to a wholesaler located in the same state (let’s call it State 1).
So, the wholesaler at state 1 buys them for Rs.1100 per piece and increases the total selling price to Rs.2,000 per bucket before selling a few of them to a retailer located in a different state (State 2). Under the pre-GST regime, this interstate sale will attract a Central Sales Tax (CST) of 12% on Rs.2,000 (which is Rs.240).
The retailer pays Rs.2240 per bucket and then increases its price by 20% (which is Rs.448) and then offers it to local consumers (who are also at state 2) for Rs.2688 plus a VAT of 15% (which is another Rs.403.20).
The end consumer ends up paying a total of Rs.3,091.20/- per bucket.
Note: Here, we have assumed the VAT rate in state 1 to be 10% while the VAT rate in state is taken as 15%. (Because under the pre-GST system, the VAT rates are different across different states)

In the above example, you can see that at every stage of the process, the application of tax is non uniform and the process of getting ITC is broken by the presence of different taxes governed by different authorities. Bottomline – Sellers lose money on taxes at every stage as they don’t get input tax credit or refund on the tax paid on purchase whenever they make a sale.